Proceedings of the Standing Senate Committee on
National Finance
Issue 4 - Evidence - Meeting of October 31, 2006
OTTAWA, Tuesday, October 31, 2006
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to examine and report on issues relating to the vertical and horizontal fiscal balances among the various orders of government in Canada.
Senator Joseph A. Day (Chairman) in the chair.
[English]
The Chairman: Good morning, ladies and gentlemen. I call this meeting to order. The Standing Senate Committee on National Finance is meeting today to continue its study into vertical and horizontal fiscal balance among the various orders of government in Canada. This is a timely study of an issue that is attracting much attention. We will be building on our previous work on the equalization formula, but will also move beyond that to consider the issue more broadly.
Today I am pleased to welcome Mr. Paul M. Boothe, Professor of Economics and Fellow of the Institute for Public Economics at the University of Alberta. I understand that Mr. Boothe was, for a year, the associate deputy minister of the federal Department of Finance, as well.
[Translation]
We also welcome Robert Lacroix, Professor Emeritus at the Department of Economics of the Université de Montréal. Professor Lacroix is also a member of the Expert Panel on Equalization and Territorial Formula Financing, which reported earlier this year.
Gentlemen, thank you for being here with us this morning. Following your introductory remarks, we'll move on to a period of questions and discussion.
Robert Lacroix, Professor Emeritus, Department of Economics, Université de Montréal, as an individual: Honourable senators, I would like to thank you for this opportunity to present to you some thoughts based on the report that we tabled this past spring.
I do not intend to restate what Mr. Al O'Brien, the Panel Chair, has probably already told you. I believe we would be wasting our time doing that. Instead I would like to focus on four more general points and contextual points that I consider important.
The first point I would like to emphasize is that equalization is an important program, but cannot be responsible for everything that works and doesn't work in Canada. However, it does make it possible to reinforce provincial autonomy and decision-making close to needs.
If we look at the equalization program, we realize that, in the past 20 years, equalization has never represented more than 1.25 per cent of our country's gross domestic product. The equalization payment is currently less than one per cent of GDP.
Second, equalization, as a per centage of federal spending, represents less than six per cent of total federal government expenditures. In fact, this program constitutes only one-quarter, 25 per cent of all transfer payments that the federal government makes to the provinces. We would therefore be ill-advised to think or suggest that equalization is the major source of all inefficiencies that we can find in this country. It will moreover be extremely difficult, if not impossible, to isolate the specific impact of equalization on our economy, since it is included in all of the extremely large federal expenditures. It is also included in a set of federal regulatory decisions that have various effects on Canada's regional economies as a whole. I therefore think we must be extremely prudent in attempting to attribute all our country's misfortunes to equalization.
However, we know that equalization makes it possible to adjust the fiscal capacities of the provinces and thereby enables the have-not provinces to provide relatively high-quality public services comparable to those offered in the rest of Canada. And that represents a maximum opportunity for the autonomy of those provinces and also a very high degree of accountability of provincial governments.
It must be borne in mind that equalization nevertheless constitutes 21 per cent of total revenues of the provincial and local administrations of Prince Edward Island, 18.4 per cent of those of New Brunswick and so on. For those provinces, this does not have a marginal effect on their ability to support public services closely. This is also a remarkable source of autonomy and responsibility for these provinces in the very spirit of our Confederation. I'll come back to this point after my second point.
The second point I would like to raise is that, in all democratic countries, there is a redistribution of income among individuals and also among regions, even if there is no formal equalization program. That is the case of the United States. The Department of Finance presented quite revealing data on this point in order to clearly show to what extent the states gave back much more than they received from the U.S. federal government. All other things being equal, redistribution was even greater than in Canada, even without an equalization program.
One need only live in a number of European countries — France being an example in this regard — to realize that, in a country as unitary as France, when you walk around, you notice a remarkable constancy in the quality of infrastructures in that country. Roads are of very high quality across the country; transportation infrastructures are of very high quality across the country; you find a relatively homogeneous education system across the country, and you have an entirely comparable health system in all regions of the country.
And yet Lorraine is not as wealthy as the Rhône-Alpes region, and Rhône-Alpes is not as wealthy as Paris. So what is going on? The central government takes money from some regions and redistributes it to others. We do not know how much because there is no equalization program. My impression is that it is distinctly more than what is done in Canada.
Other examples could be cited on this point. A single redistribution is done in the provinces of our country. If the greater Toronto region decided that all taxes collected there must be spent there, what would happen in Ontario? It would be a disaster, a catastrophe.
So even at the provincial level, without there being equalization, you have this redistribution of wealth and income. I think this is a very important aspect.
Do those who criticize equalization really think it would be more effective to have a unitary system to do exactly what the provinces are doing with the help of equalization? Redistribution could not be avoided in any case.
Would it be more effective for a central government itself to spend on all public services in all regions of Canada? That is the only question. Because, otherwise, we would have redistribution in any case. In the present Canadian system, and currently in Confederation, it appears there is universal agreement that things must happen differently. That is what has occurred.
The third point I would like to emphasize is that Canada and the entire world in which we live have vastly changed in the past 50 years. The cost of solidarity in Canada has risen considerably, as a result of which we probably find it increasingly hard to convince Canadians of various regions to take part in this redistribution.
Why is this the case? If you consider the 1950s, the 1960s and even the 1970s, you will recall that we had a relatively integrated Canadian national market surrounded by tariff barriers that protected it relatively well from the rest of the world.
As a result, certain industrialized provinces — with Ontario in the lead and Quebec somewhat as well — were, for that Canadian market, the major suppliers of manufactured goods and a large portion of the most sophisticated services.
Consequently, it was much easier to be generous because generosity merely maintained a market that we fuelled ourselves. In other words, when Ontario sent a dollar to the Atlantic Provinces, it received, in return, 85 cents in purchases that the people in the Atlantic region made out of all Ontario goods and services. Generosity and solidarity therefore cost a lot less than they cost now.
What is currently happening with the opening of markets is that the Canadian market as such represents very little in the overall market in which Canadian businesses operate. As a result, all Canadian regions are subject to strong international competition and all source internationally to a much greater degree than in the Canadian market.
In these circumstances, when you send a dollar to one region, you get much less back than you used to get, and, when costs increase, those who pay them begin to find they're too high.
Another very important factor in the change in this country is that wealth is increasingly being created in the West. This is a new feature and a paradigm shift in Canada. It also represents a redistribution of economic and political power in this country.
This wealth that is being created in the West is even more disconnected from the Canadian market than anything we have previously seen. Oil and gas are completely exported outside Canada, as a result of which, when Alberta sends one dollar outside Alberta, not a cent comes back to it, since the Canadian market counts for virtually nothing in the Alberta market.
It must be understood that people in the regions are increasingly wondering about the cost of Canadian solidarity. If we in this country cannot demonstrate that, beyond the financial cost of solidarity, we derive enormous benefits from the country we call Canada, I believe we will have growing problems with all redistribution programs in this country.
This is not typical in Canada, and that is because we have a particular equalization program about which people are more excited here. All countries of the world, whether they are unitary or federated, are experiencing the same phenomenon and the same international competition. There too, the regions will find that the cost of solidarity is rising in all those countries, just as it is in ours. Some extremely important and serious thinking must be done on this point, because, beyond a billion or two more or less, there is much more behind the reluctance we increasingly see expressed in this country.
The final point I would like to emphasize focuses more on the work we did on the expert panel. I will not go back over what Mr. O'Brien may have told you, but I would like to emphasize one point. I think it is very important that we look at the results of our work as a whole package. It is quite clear that, in preparing that package, we ran every possible and imaginable simulation in an attempt to find the combination that we thought, in a way, the best, having regard to the circumstances.
The best because it was the least disruptive for the largest number of provinces, and the best because it seemed to be at the level of what we can imagine for this program in financial terms. We therefore took into consideration a set of factors, and we thought that it was the second best solution, since there was no best solution.
In the circumstances, the only question we must ask ourselves is whether we can find another package that would have all the qualities of the one that has been proposed to you in committee, but that would have fewer faults than this one and would be more acceptable to everyone. I don't think we can.
After one year of work, thought and discussion with the provincial governments, I don't think we can. That is why we say that we believe that this is the basis of a settlement that we consider is the optimum compromise possible in the current context and in Canada's current situation.
The Chair: Thank you, Mr. Lacroix. We will now turn the floor over to Mr. Boothe.
[English]
Paul M. Boothe, Professor of Economics, Fellow, Institute for Public Economics, University of Alberta, as an individual: Thank you, Mr. Chairman, for inviting me to appear before the committee. I distributed some notes ahead of time, which I do not intend to read but will use to guide my remarks.
I have read the transcripts of the meetings of the committee and so I decided to focus my remarks on a specific issue not covered by previous witnesses. I would like to speak to the special nature of natural resources in a reformed equalization program to try to give the committee a sense of the importance of natural resources in the history and political culture of Western Canada. Although I am an economist, I will be a bit of a historian and political scientist today.
As senators are aware, the expert panel report, which I strongly support, made a number of recommendations regarding natural resources. Those recommendations have attracted a lot of attention and some criticism from premiers, but I hasten to say that that criticism spans the full range of possibilities from not including natural resources at all to including them 100 per cent. As a former senior public servant, both associate deputy here and as a deputy minister of finance in a provincial government of an equalization-receiving province, it seems to me a good sign that the report strikes a balance between the various interests that we see.
What did the expert panel recommend vis-à-vis natural resources?
I would like to focus on four things; first, that all natural resource revenues be treated in an equivalent fashion, without regard to whether they are deemed to be renewable or non-renewable; that natural resources be measured by actual revenues rather than by the synthetic tax bases as finance officials have calculated in the past; that 50 per cent of natural resource revenues be used to calculate equalization entitlements; and finally, a recommendation that interacts or has the potential to interact in an important way with the first three recommendations, that no province receive equalization beyond the point at which its fiscal capacity rises above that of a non-receiving province — the so-called cap.
I will not spend too much time on the first two recommendations. The first simply recognizes that there is little practical difference between renewable and non-renewable resources: both go for a long time and both are subject to a fair amount of volatility. The second recommendation recognizes that although natural resource rents are the theoretically preferred way of measuring these revenues, they are unobservable and hard to estimate. If sometime in the future we become better at working with natural resource rents, then perhaps they will be what we should use; I believe that is what the expert panel recommended. However, for now, using actual revenues is a much more transparent way of measuring than the complex and, frankly, judgment-based measures that we have relied on in the past.
The last two recommendations lie at the heart of the expert panel's treatment of natural resources. In my view, they satisfy two critical principles that the equalization program should have.
The first is that they recognize the special place that natural resource revenues occupy in Canadian federalism, that provinces should receive some net benefit from the ownership of natural resources even if they are recipients of equalization.
The second is that basic fairness to all Canadians dictates that that the equalization program not make perverse transfers, that is, from residents of provinces with lower fiscal capacity to provinces with higher fiscal capacity. To understand what I mean by this principle, think about a government program that transfers income from poor people to rich people. We would all agree that such a transfer or such a program would violate a basic principle of fairness on which our society is based. The same principle should underlie the equalization program. If it does not, Canadians will not support the program and the solidarity in our country that underlies this program will be lost.
I will focus on the first principle, that the nature of resource revenues is special; it has a special place in Canadian federalism. The implication that follows is that, because of its special nature, natural resource revenues require a special treatment in equalization.
One piece of our history that is known by all Canadians living on the Prairies, but largely unknown in Central or Eastern Canada — and I can say that as someone who grew up in Ontario — is that the Prairies entered Confederation as second-class provinces. Unlike the original provinces, which retained control of their natural resources under the Constitution Act of 1867, in the case of the Prairie provinces control of natural resources was retained by the Dominion government.
Albertans, especially, resented that second-class status and from the outset fought very hard to gain equality with other provinces. A signal day in Alberta's history was December 14, 1929, when Premier Brownlee of the United Farmers of Alberta signed the Natural Resources Transfer Agreement with the government of Prime Minister Mackenzie King.
The preamble to that agreement stated:
And whereas it is desirable that the Province should be placed in a position of equality with the other Provinces of Confederation with respect to the administration and control of its natural resources as from its entrance into Confederation in 1905...
That was an important day in Alberta's history. To illustrate the depth of feeling in the West over this issue, I will read you a quote from Palmer and Palmer's book Alberta: A New History, in which the authors describe Premier Brownlee's return to Alberta by train in December after having signed the agreement. The premier arrived in Edmonton in the evening several days later.
When Brownlee returned from Ottawa, over 2,000 people met him at the railway station in Edmonton in freezing weather. Organizers lit a large bonfire, a band played and fireworks exploded into the night.
When was the last time a premier came home from Ottawa to that kind of reception?
That same feeling about natural resources never developed in Central or Eastern Canada — and, senator, maybe you are right, maybe more recently in Newfoundland — because Canadians in those regions never had to fight for their constitutional equality on this matter.
This, in turn, helps us understand the depth of feeling over the National Energy Program. Of course, the National Energy Program, NEP, was devastating economically to Alberta and Saskatchewan. It will always be remembered in the history of the West. To paint that picture for you I have some statistics from Mansell and Percy's Strength in Adversity: A Study of the Alberta Economy. For example, in 1981-82, in the aftermath of the National Energy Program, drilling rigs operating in Western Canada declined from 550 to 120. Alberta GDP growth fell by 10 per centage points. Alberta's unemployment rate rose by 9 per centage points. Net migration to Alberta went from positive 10,000 to negative 30,000. Finally, the most telling of all statistics, over the period 1982 to 1985 there were more than 20,000 residential mortgage foreclosures in Alberta, a province of two and a half million people at the time.
The NEP had a big effect. It went to the heart of the natural resources issue for Western Canada. In my view, it was analogous to the 1982 repatriation of the Constitution to Quebecers. In some ways it was even more profound because it was linked to such economic devastation. Alberta had never suffered such a blow since the Great Depression. That is why Albertans feel that they can never let that happen again.
Like the repatriation of the Constitution, the NEP changed the course of Canadian history. You all know, senators, that it contributed to the rise of the Reform Party, in the sense that the West feels, as much as we love Canada, that it is essential that we be in control of our own economic destiny.
Hopefully I have given you a quick sense of the special nature of natural resource revenues in Western Canada, and now I can link that to the special treatment of those revenues in the equalization program as proposed by the expert panel.
The basic principle of the panel was that even equalization-receiving provinces should receive some net benefit from owning natural resources. That benefit can be limited but not eliminated by the calculation of equalization entitlements. That is why the panel proposed that only 50 per cent of natural resource revenues be included in the calculation of entitlements.
Some have argued that this principle may be in contradiction to the fourth principle I talked about, that the equalization program should not make perverse transfers from poor to rich. I disagree with those commentators. I would argue that the second principle is in place precisely to ensure that the first principle not result in a perverse outcome. Residents in a province with lower fiscal capacity cannot be asked to contribute to a transfer to a province with a higher fiscal capacity.
In sum, my view is that the two principles exist harmoniously. The first says that even equalization-receiving provinces should receive some net benefit from owning natural resources, and the second says that receiving such a benefit should not be allowed to pervert the fundamental fairness of the equalization program.
Senators, if you permit me a few more minutes, I would like to turn to two other issues related to natural resources and equalization. The first is the contention that the program creates incentives for provinces to develop their natural resources inefficiently. The second is that the contention that provincial ownership of natural resources imperils the affordability of the equalization program.
A number of researchers have focused on the incentive effects in the equalization program. Based on theory and a very small amount of empirical work, they have argued that equalization creates financial incentives for provincial governments to under develop natural resources or neglect economic development more generally.
In my view, this conclusion comes from isolating a small factor in a complex set that determines economic development efforts in a province. It also comes from leaping directly from theory to policy. That is always a dangerous thing and something I warn my students against.
In my experience as a provincial deputy minister of finance in an equalization-receiving province, I cannot point to even one example where equalization concerns prevented the government from proceeding with an economic development initiative, even though finance officials always pointed it out. Governments and the politicians that run them do not maximize revenue or profits like the private sector. Instead they try to maximize the welfare of voters. The most important factor determining whether an economic development initiative will proceed is how it affects employment. In the simplest terms, governments seek to maximize employment, not tax revenue; thus, the impact of equalization is not a significant concern in these decisions.
I turn next to the idea that provincial ownership of natural resources imperils the affordability of the equalization program. The core of the argument is that because the federal government does not have access to natural resource royalties, spikes in the energy market lead to additional equalization payments from the federal government without any additional revenue accruing to Ottawa to pay them.
The premise of that argument is false. A recent study of the oil sands, the biggest energy project in Canadian history, shows that, from 2000 to 2020, the majority of government revenues from the oil sands will accrue to Ottawa through corporate and personal taxes.
Senators, you should have some charts in your package. The first chart shows the estimated distribution of revenues by government. You can see that over this period the federal government will receive $51 billion. The next bar is actually the Alberta government, at $44 billion. Other provinces get $12 billion; and municipal governments, $17 billion.
The second chart shows how these revenues will be distributed. You can see that royalties from the oil sands make up only about 20 per cent of the total government revenues. The idea that the federal government does not get access to these revenues is simply false.
Senator Murray: How does it happen that the other provinces get $12 billion?
Mr. Boothe: Because much of the material for the oil sands comes from other provinces, their tax revenue is affected.
In summary, natural resource revenues should play a special role in the reformed equalization program because of their place in the Constitution and in the history and political culture of the West. I support the expert panel's recommendation that 50 per cent of natural resource revenues be included in the calculation of entitlement based on that principle.
That right is not unlimited. Therefore, I also support the expert panel in recommending that such a benefit should not be allowed to result in perverse transfers that undermine the fundamental fairness of the program. I support the cap. The expert panel's proposed principle-based, formula-driven program strikes an appropriate balance between the interests of Canadians in all our regions. For that reason, the expert panel's report deserves our support and the panel our thanks.
Senator Stratton: There are two types of natural resources, renewable and non-renewable. Should non-renewable resources be included in the formula? Coming from a province like Manitoba where we have a renewable resource called hydro, I am curious to hear your views on whether or not that resource should be used in a calculation of natural resources.
[Translation]
Mr. Lacroix: Senator, perhaps I can say a few words on that point and Paul can definitely add to that.
When we looked at the differences between renewable and non-renewable resources, we quickly realized that, on a time horizon that was appropriate for policy purposes, those differences did not exist.
We can very well talk about the fact that Alberta oil will gradually decrease, but, with the oil sands, they still have about 100 or 125 years worth. So, on a horizon of 100 or 125 years, it doesn't make much sense to start drawing a distinction between renewable and non-renewable resources.
If we examine a renewable resource such as fish in the Atlantic provinces, where are the fish now in the Atlantic provinces? Wood was a renewable resource, but we now realize that it is not as renewable as we thought; furthermore, when it is renewed, it is not longer competitive with what is being done in other countries.
In other words, all these notions that have a certain theoretical relevance are much less relevant in practice.
Now let us come to the question of hydroelectric power, a renewable resource in the same way as wood and fish were. In the case of hydroelectric power, our report recommended that it be treated exactly like the other renewable and non-renewable resources included in all resources. In that sense, what enters into the equalization formula are the revenues that the governments earn from hydroelectric power. However, as is the case for other renewal and non- renewable resources, we encounter a problem: the very specific calculation of the revenue that can be derived from those resources.
The complex nature of those calculations and the number of assumptions that must be made in order to achieve a determined result are such that, in the panel's view, there would be an endless debate on the 22 assumptions that should have been made to arrive at a calculation of the rent on electricity, oil and all other resources. In view of that situation, we thought that the ideal solution was to take the actual revenues that each of the governments receives, regardless of the resource, and to add them to their fiscal capacity.
[English]
Mr. Boothe: I do not have much to add except to say that the traditional argument has been that renewable resources should be included 100 per cent, and then there was controversy over non-renewable resources. Some have argued, and it has been a traditional position of my province of Alberta, that because they were non-renewable, temporary, oil and gas revenues, for example, should not be included. As Mr. Lacroix said, oil and gas revenues have turned out not to be so temporary, and we notice that as prices change, as prices rise, our ability to exploit those revenues increases, so in practical terms, from the point of view of government finances, there is no real difference.
The innovation of the expert panel report is that it treats natural resources, wherever they are, whether they are deemed to be renewable or non-renewable, equally across the country.
We have always told our students that non-renewable natural resources are distributed unequally across Canada, and that is true. However, when you consider all resources, they are distributed much more equally across Canada. For example, Manitoba and Quebec are very rich in hydroelectric power. When you broaden your definition of resources and treat them equally, you get a much more equal distribution across the country, which is important.
Senator Stratton: My concern is that whereas oil and gas are driven by world markets, hydro is established, especially in the province of Manitoba, by the government itself. The rates are the lowest in North America, and I have a problem with that. To me, that resource is our oil, as it were, for the long-term future of the province. I firmly believe we should be doing something in regard to establishing a heritage fund.
Professor, what would you say about Quebec? Do you have the same view?
[Translation]
Mr. Lacroix: In fact, the problem with hydroelectricity is that it has to be viewed historically. Historically, hydroelectricity essentially had a local market because the power grids weren't installed and because the North American market, to all intents and purposes, did not exist. In the circumstances, when electric capacity developed, there was a power surplus. It was in order to engage in economic development that highly advantageous rates were offered to consumers and industries that wanted to settle in those regions. There was virtually no exporting. The market did not exist.
What is happening now? We realize that the export market is growing considerably. There is a North American market for hydroelectric energy. We want to sell, we want to buy, and we want to have capacity, to the extent the grid is there. As a result of that, if you look at the situation in Quebec, you realize that hydro rates have been rising considerably in the past 10 years, and will continue to rise, because people realize it's not possible to let an opportunity like that pass without taking advantage of it.
Ten years ago, Hydro-Quebec paid from zero to $300 million to the Quebec government, whereas the figure today is more than $2 billion. And that $2 billion goes into the resource revenues earned by the Government of Quebec in the same way as oil rents for the Government of Alberta.
In the circumstances, I believe we have to be prudent and not attribute to electricity characteristics that it did not have in terms of export capacity 10, 15 or 20 years ago. Now that capacity exists and, given the rationales of governments, they will indeed go after as much of that money as possible.
The Government of Quebec, like the Government of Manitoba, will prefer to receive $3 billion from Hydro-Quebec and to hand over $1 billion less to equalization, rather than receive nothing at all from Hydro-Quebec because its rates are too low and it does not export to the rest of the world.
[English]
Mr. Boothe: I would add that, in a world of climate change, it is very important that we charge the full price of energy, wherever it is. In a province where most of our electricity is generated by burning coal, that includes the full environmental cost of generating that electricity. That would immediately open up a gap between coal-fired electricity and hydroelectricity. We will never be able to deal with the climate change issue if we do not go to full costing of energy in Canada. I support the remarks of Mr. Lacroix on this matter.
Senator Rompkey: I was interested and a little surprised by some of the lines in Mr. Boothe's presentation, and I would like to read a couple of them. First, on page 3 you stated:
This same feeling about natural resources never developed in central or eastern Canada, because Canadians in those regions never had to fight for their constitutional equality.
I do not know whether Mr. Boothe remembers the Canadian flag coming down in St. John's before the accords were signed. What surprises me is a lack of understanding in the West about how the East feels. It is much the same feeling. That feeling was evident when Premier Brownlee came back with his deal on natural resources. The fact is that, legally, those resources are not within the purview of Newfoundland and Labrador or Nova Scotia. The court has ruled that. Yet, the proximity is to the province, and the reality is that this is the one resource at the moment that the province has to rely on because of the demise of other renewable resources of one kind or another. That generates a depth of feeling. Before those accords, the same thing was true in our province as is true on the chart that was distributed. Between 80 per cent and 90 per cent of all the government revenues from the offshore were going to the federal government. We were getting less than 20 per cent of the government take. That is behind the depth of feeling, but I would not underestimate the depth of feeling that still retains.
The other comment that was made —
The Chairman: Do you have a question, Senator Rompkey?
Senator Rompkey: I do, but it is important to get this on the record. At least, it is important to me.
Professor Boothe said, "Much as we love Canada, it is essential that we be in control of our own economic destiny." That is what we want, too.
If I have to ask a question, I would ask how Professor Boothe feels about the two Atlantic accords and how they fit into the proposals he has made.
Mr. Boothe: Because I was the associate deputy minister of the Department of Finance and involved in the negotiation of the accords, I will not give my view of them directly; I do not think that would be appropriate. However, I will try to explain how this fits with the arguments that I made and will touch on the impacts of the accords.
When Premier Williams said that we would have had a deal if it were not for those federal officials, I was one of those federal officials.
You mentioned that, legally speaking, the offshore resources are owned by all Canadians; that is the ruling of the Supreme Court. Effectively, however, the federal government has given the benefit of those resources to the provinces. Effectively, we have the same treatment. The exact treatment would be if, when Newfoundland entered Confederation, the federal government had not allowed it to get the revenues from its iron mines, for example. That is the basis on which Alberta and Saskatchewan entered Confederation.
The expert panel's recommendation puts all provinces on an equal footing. Therefore, it does deal with that concern. Even if we say that we want the Atlantic provinces to have the benefit of offshore resources, in the expert panel's proposal they are treated the same way as Alberta, Saskatchewan and every other province.
Premier Williams and some other premiers go farther than that. They argue that no account should be taken of natural resource revenues in the calculation of equalization entitlements and that there should be no cap. As a result, no notice would be taken of that second principle — fundamental fairness — or of the importance that the program not be allowed to make perverse transfers. Under the proposal of Premier Williams, we could have transfers going from Canadians living in provinces that do not receive equalization — and there is a growing number of them — to Newfoundland, even though its fiscal capacity, including natural resources, would be much higher.
It is important that we have a special treatment for natural resources — 50 per cent inclusion in the calculation of entitlements — but it should be limited by the cap. In that way, we have a fundamental fairness limit and we cannot ask people from Ontario or other provinces to contribute to equalization payments to provinces that have a higher fiscal capacity than theirs do.
Senator Eggleton: Mr. Boothe, I appreciate that you focused on the natural resources aspect of things. We have had a lot of general commentary. We must decide whether to go with the 100 per cent inclusion or the 50 per cent inclusion.
We also have to decide whether to use a 10-province standard or a five-province standard. Do you have any comments on that?
Mr. Boothe: To professors, the choice of the standard really does not matter. To voters, to Canadians, I think the only standard that passes the fairness test is the 10-province standard.
Sometimes people talk about altering the standard in order to meet some affordability goal. In fact, it has been argued that that was really the motivation for the five-province standard that we used in the past. Take the high Alberta off, take the low Atlantic provinces off and then focus. It was a median standard.
In history, we have had an Ontario standard, back at the very beginning of equalization, as well as a 10-province standard.
My view is that, to average Canadians, the 10-province standard is the only one that really makes sense. While there is no technical barrier to having another standard, I think to maintain the political support across the country — the solidarity, as Mr. Lacroix has called it — the 10-province standard is the way to go.
Senator Eggleton: Would Canadians not say you have 100 per cent of the provinces, why not have 100 per cent of the natural resources?
Mr. Boothe: Some Canadians would say that, certainly. I think that most Western Canadians would not say that. I think it is a challenge of policy-makers to explain to all Canadians the rationale behind the program.
I have laid out why I think this is a principled approach. The challenge — sometimes of professors, rarely of public servants and always of politicians — is to explain the principled approach to voters.
Senator Eggleton: The Ontario government has said a number of things on this subject. It has complained, first of all, about some of the transfers — the Canada Social Transfer and the Canada Health Transfer. It has complained that it is getting less in those because the tax points are subject to the equalization formula. Therefore, it finds itself out of whack; it gets less for education and social services. It complains about Employment Insurance — that the person receiving Employment Insurance in Ontario is getting less than someone elsewhere in the country.
The Ontario government also says about this question of equalization that there is enough money in the whole formula and there does not need to be any more. They certainly would agree with your 50 per cent of resources. They probably also want the five-province standard, because that will lower the cost impact; and they would certainly love the cap and the principle of not going beyond the lowest receiving equalization province in terms of capacity.
What do you say about some of these Ontario points?
[Translation]
Mr. Lacroix: I am going back somewhat to what I said earlier. The cost of solidarity has obviously increased considerably, and we understand that Ontarians are asking themselves more questions than they used to.
However, in the report itself, we first talked about what we call as equalization associated with transfer payments, and we said that this problem had to be solved. We said that we really had to examine this situation so that there was no more confusion between equalization and other programs. We also said that equalization had to be done solely through equalization. Our recommendation was therefore clear on that point.
Now, fundamentally for the Ontario government, whether it be five provinces, 10 provinces, 50 per cent, 60 per cent of resources excluded or included, that is not the problem. It is the amount of equalization that will be transferred that is the problem.
Senator Murray: That is not a question of principle.
Mr. Lacroix: It's a question of principle in the sense that Ontarians believe that equalization has reached a level that probably corresponds to what they want to transfer. But I am saying that you have to look at the whole view to which the panel came and compare it to what all the provinces, including Ontario, accepted in 2005.
In 2005, the special program that they accepted stated the following: the figure was set at $10.9 billion at the outset, with a growth rate of 3.5 per cent per year, regardless of what happened to provincial disparities.
As a result, in 2012-2013, we would arrive at a program that would have been in the order of $16 billion. The formula that we propose can be much less costly than the previous one. Disparities among the provinces may decline. The price of oil is already starting to drop considerably; where will it stop? We do not know. Consequently, for Ontario, I believe that the formula proposed by the panel may ultimately be much less costly than the automatic formula that was accepted by all the provinces in 2005.
[English]
Senator Eggleton: While we are dealing primarily with equalization at this time, we will deal with the vertical aspect of this question. One of my interests is the problem with resources in cities and municipalities. I understand the constitutional framework fully, but that problem exists for municipal governments in general. Cities are not only picking up garbage and repairing sewers and sidewalks but are also dealing with social programs, the homeless and housing issues, and so on. Cities do not have the resources they need to do that kind or work so, yes, it is a vertical question. Do you have any thoughts on how that should be addressed?
[Translation]
Mr. Lacroix: When you look at the situation, if I disregard the equalization program, in my opinion, the fiscal imbalance lies much more between the federal government and taxpayers as a whole, than between the federal government and the provinces. The government only has to lower its taxes, and it will have no more surpluses and the provinces will occupy the tax field.
However, as regards the municipalities, they are provincial creations, they, under the Constitution, fall under provincial authority, and I find it hard to understand why we need federal intervention in order to help the provinces perform the role they must perform within the province under whose authority they are.
So in the circumstances, I am in favour. Let us look, for example, at the entire GST issue. A further per centage point has been promised by the government, which is equal to approximately $5.3 billion of tax room that the provinces can occupy and that could be occupied in order to turn over a portion to the municipalities; I believe that this process would be much more respectful of the order of powers in Canada, as opposed to the fact that the federal government is beginning to intervene in the municipalities.
The danger of federal government intervention is that we do not know when it will stop. There may be periods of surplus for the federal government. It may indeed decide to assist the municipalities with their infrastructure with a payment of $2 billion or $3 billion, then stick with that, saying that the rest is the responsibility of the province.
I believe that for the responsibilities to work, it is distinctly preferable that the federal government vacate the necessary tax room so that the provinces can help the municipalities perform their role. I would prefer that, and I think that would be much safer for the municipalities in the medium and long term than ad hoc federal government intervention.
[English]
Senator Di Nino: May we have your comments, Mr. Boothe?
Mr. Boothe: My view of this is simple, senator. The people of Edmonton should pay for Edmonton's services when they are largely the beneficiaries. The people of Alberta should contribute when they reap some benefit from services in Edmonton and Calgary. An argument can be made for that, but it is difficult for me to make an argument that people in Corner Brook, Newfoundland, or Edmundston, New Brunswick, should contribute to Edmonton's infrastructure. We know that federal government revenues come from everywhere in Canada. It is my view that if you can argue that the benefits are wide-ranging, then the federal government should have a significant role in funding municipal infrastructure projects.
Senator Di Nino: I would ask for clarification on the issue of the transfer of funds to municipalities, in particular to larger cities. Some countries have city states, whereby the cities have a structure that is beyond being purely municipal and created by the provinces. Mr. Lacroix, are you saying that you do not believe that the federal government has any role at all in transferring funds directly to the cities and that all funds to be directed to cities should go through the provinces?
[Translation]
Mr. Lacroix: In principle, I think it would be preferable that funding go through the provinces and go to the municipalities. There may be, and there have been, federal-provincial infrastructure programs, including an agreement for transfers, with very extensive cooperation.
What should be hoped is that, every time a program is aimed at the municipalities, it can be in perfect harmony with what the provinces want. In other words, it would be extremely unfortunate for the federal government to have its own vision of Toronto's development that is not in perfect harmony with the vision that the Government of Ontario has for the development of the City of Toronto. One can't imagine that kind of situation.
So, if there are transfer programs, they must be joint, accepted and negotiated for both parties. I very much believe in the importance of the major cities in future economic development; that is obvious; we see it everywhere. However, we must leave the municipalities full capacity to be the entrepreneurs of their city. They are under the authority of the provinces, and the provinces must be allowed the opportunity to provide them with the means.
So it is not because I come from Quebec, but I think you always have to be a bit prudent when one level of government, whose responsibility it is not, decides that it wants to have programs specific to the responsibility of another jurisdiction. I do not think that is the best way to operate a country.
[English]
Mr. Boothe: There could be an argument in the case where the federal government takes actions that specifically impact the services delivered by cities. Toronto is a bit unusual in this case because Ontario municipalities have a large responsibility for social assistance, which is unusual elsewhere in Canada. Certainly, if the provincial government were to delegate responsibility for new immigrants to the cities, then an argument could be made for the federal government's making a contribution. However, a concern arises. When we teach our students the theory of grants, we tell them that when cities receive grants from both the federal and provincial governments and their federal grant is increasing, they cannot assume that the province will not react. The natural reaction of the province is to reduce their grant because the pressure is off that program and they can deal with all the other pressures.
In principle, it is best to have a coordinated approach where the cities see the money come from one place, and therefore all the incentives are properly aligned; otherwise, you may get provinces and the federal government working against one another in their dealings with cities.
The Chairman: Thank you, Senator Di Nino, and thank you professors for replying to that. It is quite tempting to get into the vertical issues of fiscal imbalance because, as Senator Eggleton pointed out, we might not see you again. Then again, we might. At this stage, we are dealing with equalization, that is, the horizontal balance issue. In the second phase of this study, for which we already have a mandate, we will get into the vertical balance issue.
[Translation]
Senator Murray: Mr. Lacroix, on what oil price data did you base your recommendations?
Mr. Lacroix: If you look at the annex at the end of the document, simulations were run for various oil prices. The objective, which was simple, was to determine whether we could have a program that, under normal conditions, would be sustainable with various oil prices.
Senator Murray: We are talking about high, moderate and low energy prices?
Mr. Lacroix: We ran various simulations, at differentiated prices ranging from $40 to $60, assuming that it could be a little more or a little less. But that's an interval that, relative to historical variations, was a very important interval, to move from $40 to $60 and to be able to return to $40. We thought that, in such a broad range, the system would hold up. It would not get completely crazy.
Another important factor to bear in mind, and this is clearly stated in the report, is that the federal government — since equalization is a federal program — which is a government elected by all Canadians, can very well decide at one point, if the price of oil has reached $125 a barrel, that the amount of equalization is too high. What we are recommending is that the formula not be changed in order to change the amount, but that a ceiling be fixed on the amount that the federal government can pay in equalization and that the formula, as it stands, be applied without changing it. So in this context, if, at some point, the price of oil, natural gas and other resources were such that the equalization payment were to be $20 billion next year and the government only wanted to pay $12 billion, the government would say that the ceiling is $12 billion, but that it would apply the formula as it stands.
We did not take a position on the ideal amount of equalization; we believe there is not necessarily any ideal amount. That depends on how Canadians want to redistribute wealth and revenue in Canada, and that's a political decision. It is the politicians who say that they want to go to this limit and that, if they exceed such and such an amount that will cause political tensions such that the program will be called into question. That is something we cannot say. What we can say, however, is that we have a formula that seems good, that generates an amount and a way of redistributing that amount. If you find the amount too low or too high from a political standpoint, make your political decision. That is not an economist's decision.
Senator Murray: Mr. Lacroix, you have just boasted a bit about the fact that your recommendations might cost less than the new framework established by the government in 2004.
Mr. Lacroix: Depending on the assumptions regarding changes in oil prices and changes in disparities.
Senator Murray: The question is why your panel was not more generous with the provinces, since, as you recalled in your introductory statement, equalization represents only 1.5 per cent of gross domestic product, less than six per cent of federal expenditures, whereas it is 21 per cent of expenditures in Prince Edward Island and 10 per cent in New Brunswick?
Mr. Lacroix: The purpose of our panel was not to be more or less generous, but rather to find a formula that seemed more in sync with needs and the Canadian reality. When you look at the results of the application of our formula, you realize that the provinces as a whole very closely approach the fiscal capacity of Ontario. That is very generous, because there are some that start at $2,000 less than Ontario's fiscal capacity.
So we believe that the standard of 10 provinces, plus the other principles that we have put in place, lead us to results that we think are entirely fair, just and quite generous. If we are talking about generosity, we could have taken the Alberta standard, which would have cost the federal government $122 billion, which is maximum generosity, and which is unthinkable. So with the 10-province standard, if you look at the per capita spending of municipal and provincial programs in each of the provinces, you see that most of the provinces quite often have more or less than the Ontario standard with respect to expenditures. So what does generosity mean? We think this is an entirely acceptable balance.
Senator Murray: I believe Mr. Boothe had something to add.
[English]
Mr. Boothe: I do not like to think about equalization in terms of whether it is generous or ungenerous, because equalization is one of the few federal programs that has a very clear constitutional mandate. We should judge equalization on its contribution to allowing provinces to have reasonably comparable programs at reasonably comparable tax rates. That is the measure we should use.
I would like to bring the discussion back to energy because that is the elephant in the room, so to speak. Senators should be aware that even if energy prices remain at the current high levels — and, strictly speaking, equalization does not depend on energy prices, it depends on the revenues that are generated by energy — there is a profound change taking place in the Alberta energy sector. We are moving very rapidly from conventional oil and gas, which generate high royalties, to non-conventional oil and gas — not just oil, but also gas — which generate much lower royalties.
The disparities that you see, even if prices remain at their current levels, will shrink fairly rapidly in the future. This is a big fiscal challenge for the Province of Alberta — hopefully they are getting ready for it. It certainly has an impact on energy revenues and their impact on equalization in the future.
When you develop programs for the long term — not forever because no program can be designed to last forever — it is important that you do not design them to deal with the extraordinary situation of the moment without thinking about the future and what is likely to happen. The impact of high energy prices, even if those prices do not change, will lessen considerably in the next five to 10 years, and you should be aware of that.
Senator Murray: I remind both of you that some years ago this Senate committee did a study and produced a report on equalization — a report that we thought was principle-based. The principles were that equalization should be based on relative fiscal capacity of the provinces and that the best way to judge relative fiscal capacity was to include 10 provinces in the standard and 100 per cent of revenue sources to the extent that that could be done with a representative tax system. Those principles, by and large, were adopted by the Council of the Federation panel last year. As you know, I was a member of that, so full disclosure is important.
We took the position that if that principled approach produced a number that the federal government considered was not affordable, then the answer to the problem was to scale back proportionately and to take the political heat for doing so, to explain publicly what was being done.
The panel, of which Mr. Lacroix is a member and whose recommendations you support, begins by saying 50 per cent only of resource revenues. I know that Al O'Brien, who was here, and to a certain extent yourself, have dressed this up as a matter of principle. It seems to me to be only pragmatism. It could have been 40 per cent or 60 per cent but it has ended up at 50 per cent. That in itself seems to address a question of federal affordability.
On top of that, as Professor Lacroix has just reminded us, at the end of the day he is suggesting that the federal government should fix a quantum and scale back, if they feel it is necessary. You are providing, as they say, a belt-and- suspenders approach for the federal fisc.
The other matter I want to raise is in connection with what Senator Rompkey was saying about the offshore. You will be more aware of the details than I am, Mr. Boothe. Those offshore agreements go back to the 1982 negotiations with the Trudeau government. Mr. Chrétien was the energy minister then. From 1986 to 1988 there were further negotiations with the Mulroney government. Ms. Carney was the energy minister. The argument of those provinces then and now is that what they had anticipated in terms of the rate of exploration and development did not materialize; they did not get the benefit they had anticipated. They argue that indeed those accords provided for renegotiation, which is what has happened.
The panel would count 50 per cent of resource revenues for the entitlements, but then you will count 100 per cent of the revenue, as I understand it, in determining the cap. You have them perhaps coming and going. Certainly 100 per cent in terms of the cap will create an enormous — quite apart from everything else — political problem for the government. To go back to 2004, Mr. Harper's undertaking was a 10-province standard and zero inclusion of natural resource revenues. Saskatchewan welcomed that with open arms because they had had other problems, but they would have had a bonanza, and British Columbia to a lesser extent and Newfoundland to a smaller extent.
I do not know how you or he will impose a cap in which you calculate 100 per cent of resource revenues for that purpose. The problem is insuperable.
Mr. Boothe: First, let me say that 50 per cent is not the principle. The principle is a special treatment of natural resources. You are absolutely right: the implementation of the principle could be 40 per cent or 60 per cent. There is no magic to the 50 per cent. I think the expert panel was very clear. A rationale can be given, but the principle is the special treatment of natural resources. That principle applies to Newfoundland and Labrador and to Nova Scotia, in the same way that it applies to every other province.
Senator Murray: Why not 100 per cent?
Mr. Boothe: Why not 100 per cent? Because resources are distributed unevenly across the country, so it is a question of judgment. I will take off my professor hat and put on my hat as deputy minister of finance from an equalization- receiving province. Understand that this program has to attract the support of Canadians right across the country. Quite frankly, I have no problem defending the cap, because if we do not have the cap, equalization will have the capacity to make perverse transfers. That, it seems to me, undermines support for the whole program across the country and will eventually cause the program to come crashing down. I think that it is in the best interests of all provinces to have this cap, to prevent perverse transfers.
One of the few places that I disagree with the expert panel and with the Council of the Federation panel is on the idea that no matter how big the amount gets we can just scale it back. As a senior public servant, I understand that politically that is not a sustainable position for the federal government. To say that equalization turns out to be this much but we will scale it back because we find it unaffordable gives the federal government no sustainable place to stand.
My answer to that is that if we ever find ourselves in that place, we will have to have more Senate hearings and we will have to look again at this program. As I said, no program lasts forever. No program can be designed for every eventuality.
Especially given what I have said about the future of energy revenues in Alberta and its impact on the program, I do not think that affordability of the program will be a practical problem moving forward. I would not spend too much time worrying about that. I would spend more time worrying about whether we have a set of principles that we can communicate to Canadians across the country and that will at a political level attract their support.
I think that this set of principles works. Quite frankly, and Professor Lacroix has said this also, I have not seen another package that does the same thing.
Senator Murray: I think that 100 per cent of resource revenue would work, to use your term.
It is easy for a senator to say this, but I think that scaling back is a far more rational thing to do, and it is fairer in the long term to do it, as I say, in the sight of man and God and take the heat for it rather than fiddle and manipulate the formula, as we have done time after time, beginning a few years ago when I was on the other side of the table representing one of the recipient provinces to ensure that Ontario did not become an equalization-receiving province. As you recall, the federal government moved from one standard to the next. A set of principles should prevail, yours or ours, and then if necessary we should scale back. If the program becomes unaffordable, the federal government will have to explain that. In the recent climate, I do not think the political reaction would be as severe as it might have been many years ago.
[Translation]
Mr. Lacroix: I'd like to go back to the question of the per centage of 50 per cent and the 100 per cent cap. We have to be very clear on this. The provinces that do not receive equalization, like Alberta, which receives neither the 50 per cent nor the cap, are affected, but not with regard to the amount. They are not the ones that are affected.
However, the provinces that were receiving and still receive equalization are not indifferent. If those provinces have natural gas and oil, they would have preferred zero per cent inclusion, because, that way, they could draw all they could in equalization, without their oil and gas revenues affecting them negatively. So we understand that this is what those provinces wanted.
Now putting in 100 per cent inclusion removed a major incentive for those provinces, because each time they did a development that generated resources and revenues, there was a risk that their equalization would decline by the same amount.
Second, since these resources are also provincially owned, we thought it was a good idea to leave those provinces with a natural resources exploitation benefit that was different from what they would have if those resources did not belong to them.
We discussed the 100 per cent cap extensively in the report, and the ideal cap would be the one that removes 100 per cent of the costs borne by the provinces so that the resources can be developed in their province.
But that is extremely complex. First, there are no data on the subject.
Second, everything depends on the type of resource because there are not just oil and gas, but also all the other forms of resources. That depends on the age of the resource operations. That depends on so many factors that the cap reduction could range between zero per cent and 30 per cent.
We said 100 per cent in the report, but, in the event we are able to prove that, on average, for all resources, the provinces spend 15 per cent, then 15 per cent should be the cap reduction.
But we were not able to find it and we have not found data enabling us to find it. That is what explains the 100 per cent figure.
[English]
Senator Murray: One of the interesting things that Professor Boothe outlined for us was his analysis and rejection, as I take it, of the argument of supposed disincentives caused by equalization for the exploration and development of natural resources. That is certainly the experience and the testimony that we have received from various provinces at different times.
Senator Mitchell: I am sure you are aware of the think tank AIMS, the Atlantic Institute for Market Studies. They presented to us a provocative analysis, if still a work-in-progress, several weeks ago. AIMS' argument would be that equalization is an incentive to create debt amongst the provinces. Could you comment on that? Do you believe that to be the case?
[Translation]
Mr. Lacroix: It is not only creating debt, but also paying public servants higher salaries and saying that all misfortunes are the result of equalization. I do not think that is the case. I do not think that we can isolate a program that represents only 25 per cent of all federal transfers and that represents a very small portion of all federal spending done in the provinces, whether we like it or not.
I do not think we can attribute to this program the fact that a certain number of the provinces that receive equalization have a higher rate of indebtedness. Some provinces could tell you that they have a higher rate of indebtedness because they did not yet have the fiscal capacity to provide the services they had to provide and that, consequently, equalization helps them in that direction. So I do not think there is a connection.
The other factor I think is important is to say that, if ultimately the provinces did not have equalization, they would be forced to tighten their belts, to tighten the vice on their public servants' salaries, to spend less, and that would be much more effective and much better like that.
If there were no equalization, the federal government would be obliged to do the spending in the provinces and would be obliged to pay federal public servants in the provinces. I have always thought that, at the time Canada Post belonged to the federal government, the letter carriers all had the same salaries across Canada.
In other words, if federal public servants performed the duties that the provinces do not perform, because they cannot afford it without equalization, I do not see how this salary question would be different.
All kinds of arguments are put forward and presuppose that, if the services that the provinces provided with the aid of equalization were provided differently — which is what happens in other countries such as France — it would be more efficient. But no one believes that.
If services were not rendered, I wonder what a province like Prince Edward Island would do. If that province saw its revenue budget cut by 22 per cent, how would it provide its health services, its education services and its road services? I do not understand how someone could think that is possible.
[English]
Mr. Boothe: As a social scientist, I am struck that there are few other areas of inquiry that have so much theory and so little evidence. When I was Deputy Minister of Finance in Saskatchewan, we received equalization payments throughout my tenure and we paid down our debt substantially. I would like to see credible evidence that supports these arguments. Basically, anecdote takes over from evidence in these arguments and I find it hard to take.
Take the Voisey's Bay example, which is brought up all the time. I think the Voisey's Bay example is better explained by my theory, that provinces maximize job creation, than it is by the idea that provinces maximize revenue. There is only one observation. It is hard to test those two theories, one against the other.
Senator Mitchell: The Canada West Foundation has begun to write its concern that runaway wealth in Alberta will begin to create tensions in the federation. This is pure speculation, but they certainly have not addressed the question of whether, if that were to occur, there are initiatives that Alberta could take that in some way would serve the country while serving Alberta's self-interest, making the initiatives politically palatable to Albertans and a contribution to Canada that would be observed and respected by other Canadians.
Do you agree with that projection? I think your earlier argument that things would be different in the next five to 10 years may answer that, Mr. Boothe.
Are there any discussions, literature, thought or body of work being given to the idea of initiatives that Alberta could take?
I know former Premier Peter Lougheed mentioned a number of months ago the idea of Alberta loaning money to provinces to fund their debt rather than have them borrow elsewhere and internationally. Could you comment on that?
[Translation]
Mr. Lacroix: One thing is clear, however, and we have seen this around the world during oil booms. The region in the greatest danger is Alberta.
The boom that is occurring there could cause a major problem for Alberta's overall economic development. Everything is attracted to the resource sector, and no other businesses can develop as a result of high wages and the labour shortage and everything else.
This is very serious because, at some point, the oil price collapses, and you do not have the economic support that enables you to go further. We have witnessed that in other countries, and that is why certain countries have decided — to avoid this ill, this "Dodge disease" — to relieve the pressure, to lower the rate of development and to remove funds from the system to prevent too rapid development.
So the first problem arises in Alberta first. Quite obviously, it arises in the rest of Canada because Alberta is not a negligible part in the economy of Canada as a whole. As Paul Boothe correctly pointed out, there is not only one emerging problem in Alberta. There are enormous revenues coming from the federal government and other provinces. And when you look at the Canadian economy as a whole, it is quite extraordinary that, in a single country, you have an enormous potential for development of the knowledge economy — which you have in Ontario, Quebec, which you also have in the West, perhaps with less intensity; so you have the economy of the future apart from resources which is very much present — and a wealth of natural resources, including oil and gas, that everyone envies. We will not start complaining about that. We will not start saying: "It is unfortunate that we have oil and gas; if we did not have any, we would not have any problems." We must ensure that these resource developments, which will last in time because there are a lot of them, are not so harmful, in the short and medium terms, for the rest of the economy and do not cause too much damage. And we must simultaneously develop our knowledge economy and knowledge both in the east and the west of the country and ensure that there is a balance between these two elements. I believe that is entirely possible and that it is an unheard of opportunity in a country such as Canada to have at the same time brains, innovation, a knowledge economy and incredible resources enabling it to create wealth. I am saying there is definitely a chance of achieving that.
[English]
Mr. Boothe: I agree with those points. We do know that the federal government and other provinces will share substantially in the benefits of energy development in Alberta.
As an Albertan I would certainly like to see Alberta take a leading role, along with other provinces, and contribute to national life in the same way as other large provinces traditionally have. Perhaps we will see that in the future.
I would also note that currently only two provinces out of the 10 are in deficit. One is Prince Edward Island, with a very small deficit, and the other is Ontario. Part of Ontario's deficit last year was the result of last-minute spending choices.
Canadian capital markets are well able to provide the savings to finance those things. Alberta's job is to support those national programs, including the Canada Pension Plan and Employment Insurance, which allow people to move back and forth across the country to work and have the best lives they can. Beyond that, Alberta's job is to develop the human capital of the country just as all provinces are trying to.
Senator Mitchell: Apart from everything else that you both do, you are active participants in post-secondary education. There is an equalization requirement in that public policy area. There are impediments to that from the federal level of jurisdiction and the possibility of its spending power. Productivity is increasingly becoming an issue in Canada. Corporations in Canada spend a great deal less on training and developing their employees than U.S. corporations spend. The federal government has an enhanced role to play in that. How do we do that?
[Translation]
Mr. Lacroix: There are two aspects to postsecondary education. One of those aspects is the transfer payments for postsecondary education currently contained in what is called the Canada Social Transfer. They are part of the Canada Social Transfer. That is a package, a block grant, and it is not separate. It is not part of that. This is one way to give the provinces the means to better support postsecondary education.
The other, very fundamental aspect, is all the funding for university research. On average, in all the provinces, the federal government must fund between 50 and 60 per cent of all university research that is being done in the provinces, leaving roughly 40 per cent for the provinces or the private sector or other organizations.
This is an absolutely crucial and fundamental role. The danger I see right now is that we are increasing postsecondary transfer payments, but, on the other hand, we are shutting the valves on federal government support for university research. With the $1 or $2 billion that we are giving in postsecondary transfers, we would stop expanding federal research support programs in order to compensate. I am afraid of that. We must ensure that the two programs go together. The federal government has a crucial role to play in the funding and orientation of university research in Canada. It must fully play that role and continue to invest enormously. It must also support the core budgets of the postsecondary institutions, and it must do that through transfer payments to the provinces. It cannot start making trade-offs between the two. I am afraid it will try to make a trade-off, increasing transfers and cutting research funding.
Senator Ringuette: You both referred to Canadian solidarity in your presentations. I agree that equalization payments are one of the components of Canadian solidarity.
The Canadian public want a system of federal government transfer payments to the provinces that is fair, equitable and balanced. And yet a range of transfers to the provinces or to multinationals is not addressed in the various scenarios that you proposed. I will give you some very clear examples.
First, we like to point the finger at the Atlantic provinces as the great beneficiaries of employment insurance programs, but, in British Columbia alone, there are as many as in the Atlantic Provinces as a whole. Second, cash transfers under the Canada Atlantic Accord for Nova Scotia and Newfoundland get a lot of media coverage. If a survey were conducted right now, a large per centage of the Canadian population could definitely say it is aware of the major oil transfers for Newfoundland and Nova Scotia.
However, we have never heard about the substantial tax credits granted to Alberta and its businesses for oil sands development. That represents a transfer payment because, in my humble opinion, it concerns revenues not received by the federal government.
You put a lot of emphasis on Canadian solidarity in the scenarios you put forward in your document, but, when you do not consider all federal government policies that favour a particular industry or particular province and that are not in the financial media, I have a lot of trouble.
We can also talk about the Auto Pact for Ontario. With regard to the various federal government policies that favour one province or another — I can tell you that, on the whole, they favour Central Canada — the Canadian public has the feeling it is poorly informed about everything underlying those policies.
You did not take that into account in your document, and I also understand that that was not the purpose, the principle underlying equalization payments. However, at some point, voters as a whole will have to ask themselves these questions.
Mr. Lacroix: You are entirely correct, but, from the introduction of our report, we said that our mandate concerned equalization, but that there was a federal and provincial spending context and that there was a transfer context in which the government must set its own perspectives.
What is important to bear in mind is that we nevertheless have a program that has a clear objective: to try to set a standard, that of 10 provinces, and to try to ensure that, through transfer payments from the federal government to the provinces, each of the provinces roughly has a fiscal capacity that meets the set standard. At the least, this is a situation that can be observed and these are transfers that can lead the provinces toward this objective of a common standard. In that sense, we can isolate that. We can say that we know that the provinces, with equalization, arrive roughly at a relatively similar fiscal capacity, if you exclude Alberta, which is really beyond all that. The fiscal capacity of each of the provinces after equalization is very similar. So the program's objective is clear, and we think the means used to reach that objective enable us to achieve it.
Now, when I said that all those who believe that all of Canada's misfortunes and successes are the result of equalization, we cannot absolutely say that, since equalization represents only six per cent of federal spending and that does not take into account all the regulation and other regulatory policies. I was referring exactly to what you said. We cannot attribute to equalization characteristics it does not have, and we cannot ask it to do what it cannot do.
I agree with you, but that does not alter the fact that, by examining a specific program included in the Constitution, which is equalization, we can try to make this program more in sync with the objective we have for the program. Apart from that, obviously an enormous commission of inquiry would have to be conducted on fiscal federalism in Canada in order to answer your question, which is not our case and which probably was not the case of Senator's Murray's mandate either.
[English]
Mr. Boothe: You are absolutely right. The federal government and the Alberta government gave special tax treatment to the oil sands in an effort to get that industry started back when the cost of production was greater than the price of oil. My first chart shows that it was a pretty good investment. Canada and Alberta received a great deal of money from the industry's revenues. Whether that tax treatment is appropriate for the future, given that the industry is well-established, is an interesting question.
It is a mistake to try to lump those kinds of things together with equalization and even with fiscal federalism. We know that the federal government tries to encourage development in industries right across the country, such as aerospace, automobiles, fishing, pharmaceuticals, agriculture, forestry, and oil and gas. Some of the federal and provincial governments' efforts are successful and some are not successful. That is the way it is in business, where some investments are successful and some are not successful.
In the current environment, perfection is the enemy of the good. If we try to make this problem too big, we will find no solution, but if we try to keep it manageable, then we can move Canada forward a bit. We will be able to deem ourselves fortunate if we are able to move this program and, therefore, Canada, forward a little bit. Thank you.
The Chairman: Honourable senators, unfortunately, the time has come to an end. On behalf of the committee, I thank our two guests today, Mr. Lacroix and Mr. Boothe. We will send each of you a copy of the report of the committee, which we hope to generate over the next few weeks. Perhaps we will meet again to discuss the vertical fiscal balances issue.
The committee adjourned.